This project will require an investment of $20,000 in new equipment. The equipme
ID: 2740217 • Letter: T
Question
This project will require an investment of $20,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Garida pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project's net present value (NPV) would be when using accelerated depreciation. Determine what the project's net present value (NPV) would be when using accelerated depreciation. $12, 449 $11, 066 $13, 832 $16, 598 Now determine what the project's NPV would be when using straight-line depreciation. $17, 538 $13, 491 $15, 515 $12, 816 Using the_________depreciation method will result in the highest NPV for the pr No other firm would take on this project if Garida turns it down. How much should Garida reduce the NPV of this project if it discovered that this project would reduce one of its division's net after-tax cash flows by $300 for each year of the four-year project? $791 $698 $559 $931Explanation / Answer
Determine the Project’s NPV, using Accelerated depreciation:
Details
Year 1
Year 2
Year 3
Year 4
Total
Unit sales
3000
3250
3300
3400
Sales price
$ 17.25
$ 17.33
$ 17.45
$ 18.24
Less: Variable cost per unit
$ 8.88
$ 8.92
$ 9.03
$ 9.06
Contribution per unit
$ 8.37
$ 8.41
$ 8.42
$ 9.18
Total contribution
$ 25,110.00
$ 27,332.50
$ 27,786.00
$ 31,212.00
Less: Fixed operating costs except deprecation
$ 12,500.00
$ 13,000.00
$ 13,220.00
$ 13,250.00
Less: Accelerated depreciation ($20,000*0.33)
$ 6,600.00
$ 9,000.00
$ 3,000.00
$ 1,400.00
EBT
$ 6,010.00
$ 5,332.50
$ 11,566.00
$ 16,562.00
Less: Tax rate
$ 2,404.00
$ 2,133.00
$ 4,626.40
$ 6,624.80
EAT
$ 3,606.00
$ 3,199.50
$ 6,939.60
$ 9,937.20
Add back: Depreciation
$ 6,600.00
$ 9,000.00
$ 3,000.00
$ 1,400.00
Cash flows
$ 10,206.00
$ 12,199.50
$ 9,939.60
$ 11,337.20
PV factor @11%
0.9009
0.811622
0.731191
0.658731
PV of cash flows
$ 9,194.59
$ 9,901.38
$ 7,267.75
$ 7,468.17
$ 33,831.88
Less: Initial investment
$ 20,000.00
NPV
$ 13,832
Therefore, the NPV is $13,832 (rounded).
Determine the Project’s NPV, using straight-line depreciation:
Details
Year 1
Year 2
Year 3
Year 4
Total
Unit sales
3000
3250
3300
3400
Sales price
$ 17.25
$ 17.33
$ 17.45
$ 18.24
Less: Variable cost per unit
$ 8.88
$ 8.92
$ 9.03
$ 9.06
Contribution per unit
$ 8.37
$ 8.41
$ 8.42
$ 9.18
Total contribution
$ 25,110.00
$ 27,332.50
$ 27,786.00
$ 31,212.00
Less: Fixed operating costs except deprecation
$ 12,500.00
$ 13,000.00
$ 13,220.00
$ 13,250.00
Less: Accelerated depreciation ($20,000/4years)
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
EBT
$ 7,610.00
$ 9,332.50
$ 9,566.00
$ 12,962.00
Less: Tax rate
$ 3,044.00
$ 3,733.00
$ 3,826.40
$ 5,184.80
EAT
$ 4,566.00
$ 5,599.50
$ 5,739.60
$ 7,777.20
Add back: Depreciation
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
Cash flows
$ 9,566.00
$ 10,599.50
$ 10,739.60
$ 12,777.20
PV factor @11%
0.9009
0.811622
0.731191
0.658731
PV of cash flows
$ 8,618.01
$ 8,602.79
$ 7,852.70
$ 8,416.74
$ 33,490.23
Less: Initial investment
$ 20,000.00
NPV
$ 13,490
Therefore, the NPV is $13,491 (rounded).
Using the accelerated depreciation method results higher NPV of $13,832.
Details
Year 1
Year 2
Year 3
Year 4
Total
Unit sales
3000
3250
3300
3400
Sales price
$ 17.25
$ 17.33
$ 17.45
$ 18.24
Less: Variable cost per unit
$ 8.88
$ 8.92
$ 9.03
$ 9.06
Contribution per unit
$ 8.37
$ 8.41
$ 8.42
$ 9.18
Total contribution
$ 25,110.00
$ 27,332.50
$ 27,786.00
$ 31,212.00
Less: Fixed operating costs except deprecation
$ 12,500.00
$ 13,000.00
$ 13,220.00
$ 13,250.00
Less: Accelerated depreciation ($20,000/4years)
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
EBT
$ 7,610.00
$ 9,332.50
$ 9,566.00
$ 12,962.00
Less: Tax rate
$ 3,044.00
$ 3,733.00
$ 3,826.40
$ 5,184.80
EAT
$ 4,566.00
$ 5,599.50
$ 5,739.60
$ 7,777.20
Add back: Depreciation
$ 5,000.00
$ 5,000.00
$ 5,000.00
$ 5,000.00
Cash flows (after tax)
$ 9,566.00
$ 10,599.50
$ 10,739.60
$ 12,777.20
Adjusted cash flows (after tax-$300)
$ 9,266.00
$ 10,299.50
$ 10,439.60
$ 12,477.20
PV factor @11%
0.9009
0.811622
0.731191
0.658731
PV of cash flows
$ 8,347.74
$ 8,359.30
$ 7,633.34
$ 8,219.12
$ 32,559.50
Less: Initial investment
$ 20,000.00
NPV
$ 12,560
NPV would reduced by $931 (i.e., $13,491-$12,560) with the given conditions.
Details
Year 1
Year 2
Year 3
Year 4
Total
Unit sales
3000
3250
3300
3400
Sales price
$ 17.25
$ 17.33
$ 17.45
$ 18.24
Less: Variable cost per unit
$ 8.88
$ 8.92
$ 9.03
$ 9.06
Contribution per unit
$ 8.37
$ 8.41
$ 8.42
$ 9.18
Total contribution
$ 25,110.00
$ 27,332.50
$ 27,786.00
$ 31,212.00
Less: Fixed operating costs except deprecation
$ 12,500.00
$ 13,000.00
$ 13,220.00
$ 13,250.00
Less: Accelerated depreciation ($20,000*0.33)
$ 6,600.00
$ 9,000.00
$ 3,000.00
$ 1,400.00
EBT
$ 6,010.00
$ 5,332.50
$ 11,566.00
$ 16,562.00
Less: Tax rate
$ 2,404.00
$ 2,133.00
$ 4,626.40
$ 6,624.80
EAT
$ 3,606.00
$ 3,199.50
$ 6,939.60
$ 9,937.20
Add back: Depreciation
$ 6,600.00
$ 9,000.00
$ 3,000.00
$ 1,400.00
Cash flows
$ 10,206.00
$ 12,199.50
$ 9,939.60
$ 11,337.20
PV factor @11%
0.9009
0.811622
0.731191
0.658731
PV of cash flows
$ 9,194.59
$ 9,901.38
$ 7,267.75
$ 7,468.17
$ 33,831.88
Less: Initial investment
$ 20,000.00
NPV
$ 13,832
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